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Fear

You can get a 0.05 percent interest rate today on four-week Treasury bills. That is roughly half the yield available yesterday, and a sign of another flight to safety above all else.

Yet rates on interbank loans, which soared after the investment bank Lehman Brothers was allowed to fail, are coming down only slowly, and are far above the pre-Lehman figures. The same government that is guaranteeing new bank loans is promising to redeem Treasury bills. But the banks still are nervous.

Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr., are trying every trick they can think of to restore confidence in the credit markets. Unfortunately, the banks appear determined to sabotage those efforts.

Here are some ideas Mr. Bernanke and Mr. Paulson could consider:

1. Call in the top bankers, as well as a group of leaders of smaller banks and bank trade associations. Tell them that you expect them to lend to each other willingly at low rates, and that if rates stay much higher you will have something to say about that. If the banks do not trust each other, why should anyone else trust them?

2. Tell the bankers to quit begging and lobbying for exemption from the mark-to-market accounting rules. Even if their arguments have merit, they are counterproductive. You do not restore trust by letting banks say toxic assets are worth whatever the bank’s own models say they should be worth, when they are trading for far less.

3. Point out to them that they can apply for government capital infusions, and spend some of the money on those assets. If enough of them are willing to buy, the prices will rise. If the rest of them insist on selling into that demand, then the prices will not go up.

4. Call in Christopher Cox, the Securities and Exchange Commission chairman, and ask him why his commission is reinforcing the impression that the regulators want to save banks from the truth. The major accounting firms all agreed that banks could not use one tactic to inflate values of a class of assets, but the S.E.C.’s chief accountant yesterday decided they could do so.

The S.& P. 500 and the Dow industrials today fell to just above their closing lows of last Friday, and the Nasdaq composite sank to a five-year low.

The banks remind me of that old Jack Benney joke where the thief says, “your money or your life” – a few seconds go by and he repeats it again. Benney finally responds to the threat by stating “I’m thinking, I’m thinking.”

its not fear it’s the continued greed and finding all tthe loopholes. The accounting firms are trying to be “ethical” the banks just want to rape the system that saved them. same shit different day……very sad have we not learned anything?

Is fear unreasonable when there are $60 trillion outstanding in credit default swaps? A few hundred billion infusion into the financial system would seemingly make barely a dent if a significant fraction of these needs to be paid off.

If banks, on their own, can’t or won’t do what banks need to do to prevent their own failure and the consequent failure of the larger economy, then it’s time for the government to step in, take over the banks, and do what needs to be done.

You’re willing to advocate that the Fed and Treasury lead what amounts to a conspiracy among bankers to paint the tape on the LIBOR index by arranging token loans to create the illusion that the index is moving down –

You’re also willing to advocate that the banks paint the tape on trades of asset-backed securities, to allow the “mark to market” writedowns to stop –

But you’re not willing to entertain the mere idea that the “mark to market” rules are themselves somehow flawed?

So you demand rigorous application of “mark to market” rules, even as you advocate having the banks engage in what amounts to phony transactions in order to corrupt the market signals that underlie the process of marking to market?

And how about this: shed the rigid free-market ideology and demand what any responsible owner would expect. You are saving these banks, so you should insist on transparency, reasonable pay, and sound lending practices. No private owner would be stupid enough to cede control and be a silent investor where the stakes are so high. Why should the government?

Yes, fear is rampant, but for what reason(s)? I suspect a lot of the fear is generated by the lack of transparency in the CDS market. The banks probably do not know who their counterparties actually are nor the status of their ability to pay. Thus, they refuse to extend credit to each other. The CDS market is estimated at $55 to $60 trillion dollars; far above the total dollars of subprime mortgages at risk and far above the total US government indebtedness The “free market” is fast becoming extinct given the excesses that have occurred and no proposals are going to save it.

Absolutely mind-boggling, still playing with accounting tricks. Investors are demanding realistic financial assessments and presentations. Yet here we have the banks and the SEC (and of course the accountants) still playing silly little abstract accounting games to make them appear stronger than they are. Amazing.

Do the banks feel no noblis oblige to help? Good grief. Step up to the plate ladies and gentlemen. First you were addled by greed, and now it’s fear. Find a middle ground and come to the aid of your country.

The banks should be broken up with anti trust laws and we should return to community banks who know your name and credit risk when you walk in the door. A software program and some 500K MBA in accounting on wall street cannot distinguish between me and some deadbeat who should never be issued credit. Until we go back we are actually MORE at risk now that there will be only 3 banks left in the world!

Yes, there would probably be some ugly lawsuits, and some settlement deals would have to be worked out, but at least the sword of Damocles is no longer threatening everyone on a daily basis. Then get future cds agreements on an open exchange where the margins of the players
are marked to market multiple times a day and if you don’t have the money, you’re out — just like stocks and commodities.

John Dizard’s ‘View from the US’ in the Financial Times referred to a “…need centrally cleared and settled CDS trading.” He was referring to the credit default swap market. In today’s FT (15.10.08) a letter has been published with the headline over it: “Derivatives trades must move to clearing house model”.

Until this toxic waste is rounded up, isolated and traded in a totally separate market the markets and every economy on the globe is belly up in the water.

It is filth and should be treated like an oil spill or the aftermath of an earthquake and not treated with the same respect and rules as cash, stocks and shares or bonds of other kinds.

Of course the banks should mark-to-market. We know that, they know that, even the SEC knows they SHOULD. But Floyd – isn’t the problem that if they do mark-to-market they’re no longer in business no matter how much the government tries to throw at them? Isn’t the problem one of scale – there’s more writedowns than can possibly be supported by intervention of any sort? This crap on their books is worth less and less and less even as I write this sentence …

It doesn’t appear that anyone in the financial community believes a bloodletting is in order. That rampant consumerism built on loose credit should not only be sustained, but encouraged. You yourself wrote that you thought 10,900 on the Dow represented a bottom and it might be time to start investing again. Yet if you look at the last 20 years of the market inflating due to trickery and mirrors, a more reasonable prognostication would be 7,000. Or perhaps 5,000, if you wring all the excesses out. It is a shame that so many of us are losing their shirt, pants, jacket, shoes, and hope for the future based on chicanery in the banking industry. But to get the bull market back right now, you’d have to encourage the banks to start lying, cheating, and stealing again. Is that really where we are as a nation? Or a world? One giant commercial for greed and excess? I hope not. Let’s take our medicine and learn from it.

It seems that banks don’t trust one another because they don’t know the actual amount of toxic holdings in each others accounts- or they don’t trust the accounting methods used to derive the worth of those assets. Why not have the top bankers and group leaders sit down and honestly hash out the value of these assets- off the books? That way no one is truly exposed- in public- and once they realize everyone is in the same boat the Feds can declare that everything is in order and “safe” thereby restoring confidence- i.e. Roosevelt’s bank holiday accounting scheme in the 1930’s.

Fine suggestions all, ideas that Bernanke might well endorse and even be eager to implement. But we all heard Paulson yesterday. The financial institution “rescue program,” he said, goes against the American grain, the state should not be investing or interfering in private enterprise–that’s not the American way, that’s not real capitalism. So, let the bankers and their agents manage the “rescue,” keep state intervention to a minimum (no voting shares, no representation on company boards, just give them them the money and left them do as theiy please–one more example of the outsouircing or sub-contracting of government services, only this time with mega-billions or public monies), With such enthusiastic support on Paulson’s part, how can we expect the rescue package to work. Norris’s suggestions seem to conflict with Paulson’s beliefs and sentiments. We may just have to wait until January for someone in political power to speak sense to the financiers. More to the point, however, the economic crisis is far worse and even more systemic than the financial collapse. With real incomes shrinking, as David Leonhart pointed out today, the cost of necessities continuing to rise, jobs becoming scarcer, and working hours declining, a red-blooded depression may be in the offing, the likes of which we have not experienced for seventy-five years. As Robert Skidelsky pointed pointed out in today’s Washington Post, we sorely need a modern day Keynes, or if not that, policy-makers willing to provide Keynesian cures to our economic ills.

Here’s a fifth idea: go to the business section of WashingtonPost.com and read an excellent article entitled “The Crash: Risk and Regulation–What Went Wrong?”. You will read that the current crisis has been abuilding for decades and that it may take years and years and trillions and trillions to fix (my personal opinion.)

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